April 25 2020

COVID-19 And The Economic Standstill:

The spread of the COVID19 pandemic has caused an unprecedented human and health crisis and the imposition of lockdowns, has brought the world to a standstill with the plunging global economy. The measures necessary to fight and contain the virus is causing huge financial drainage and is further triggering the economic downturn. This unprecedented crisis demands unprecedented response but the ever increasing number of transmission and casualties with uncertainty about its severity and length have confused international organisations, local bodies, politicians and administrators and experts how to plan, what plan is required and how to gauge the after effects of this pandemic and above all how to recover from it. It seems like with increasing Covid 19 infections and deaths, the expertise of the experts are failing.

The international community is sweating out round the round clock like never before to produce a safe and effective vaccine for corona virus.

The global lockdown has forced business people and employees to tap into their savings to meet their daily needs but how long? With no alternative source of income, investments and risk assets are bound to decline and are infact crushing. This has made a vague global macro-economic scenario.

IMF warns that the global economy is set for its sharpest reversal since Great Depression of 1930's. The emerging markets and developing nations are the worst hit. People at the moment are fighting two pandemics- one the viral contagion and the other the financial anxiety brought on by the economic lock down. Although these two are different, but are inseparable as both are touching human lives. The government is in a fix. In one side the virus that is spreading rapidly causing infections and deaths and on the other hand the constantly dipping economy because of the evitable lock down. But as life comes first, Health Sector is prioritized and the government exchequer is squeezing may be at times is paying through the nose. Also with the hope to stabilise the financial systems and support the economy, Central Bank is acting as the first line of defence by significantly easing monetary policy, by cutting repo rates, policy rates, provided additional liquidity to the financial system through open market operations, relaxing the NPA (Non-performing Assets) norms of 90 days.

But, economic pessimism is in the air. India has been in a state of nationwide lockdown since March 25 and now the economic consequences are really frightening. Business entities are finding increasingly difficult to sustain. Even though the business is closed, it has some steady expenses to meet. It needs to pay its staff salary, pay rent, utility bills etc. etc. It can be foreseen that majority of small business units will run out of working capital within a couple of months. Also majority of micro and small business (MSEs) in the developing country are worst hit by the COVID-19 pandemic. Every single sector right from petty shop keepers to industrial giants have significant economic effects. All these are bound to reflect negatively in the macro economic scenario.

For developing economy, if the COVID19 crisis is short lived, and resumes its operations, it can sustain the abrupt negative demand shock and have a V-shaped recovery with some stimulus from the government. But if the labourers and workers migrate there could be a potential loss in GDP as the supply side will take time to meet the demand side. Economy can survive the demand shock without a permanent loss of GDP, but supply shocks, also known as structural problems will lead to permanent loss of GDP and is compelled to have a U-shaped recovery. The possibility of W-shaped recession can also not be neglected or in the worst case scenario L-shaped recession with very little hope of recovery until and unless the government introduces some significant reforms. Having said this, it is to be noted that the recovery path will be different for different nation.

In some countries, the virus became active much later, but is spreading rapidly. In order to avoid grim a situation, the government should adopt free-market economy and should also directly transfer cash to those in desperate need, including daily wage labourers with no conditions or rider what so ever and wait for domino effect. It is also the duty of the government to ensure that people working in the affected industries are provided with the basic needs like food, salaries, insurances and job security so that the labourer and employees can survive this tough time. This step will definitely put pressure on the fiscal deficit; but desperate times call for desperate measures.

Yes, disruptions to business and the labour force must be avoided to ensure that the lockdown does not lead to structural problems, and to create the conditions necessary for V-shaped recovery but it is seen that workers and labourers are migrating to their native places. As such V-shaped economic recovery seems to be a distant dream. The state of the global economy in a post-pandemic world will depend on the pace of revival, quality of decision making and implementation in various countries.

May Be Its Time To Reckon That Post Covid 19 A Reorder Of The Society Is For Sure